Exactly how the acronym of ESG has become the topic of such heated pushback will make for a good doctoral dissertation in sociology. It has become a term derided on both the left (“it’s not true sustainability”) and the right (“it’s a progressive political agenda”). Both camps are being given reasons for doing so by those, both in the corporate and investment community, who claim too much for it (“ESG will save the world!”). Passions are running high all around, with people often talking past each other given the meaning they are imputing to ESG.
It is healthy to have a debate about ESG: What it is, and what it isn’t; what it can’t do, what it can do, and what it was never meant to do. The term has probably run its full life cycle, and it is time to address the underlying issues of what is being debated.
For starters, Dan Crowley (R) and I have argued that it is important to separate material risk disclosures from salient political issues. We can use climate change as an illustrative example. If investors deem how a company is adapting to climate change to be a material issue, then companies should report on it. After receiving a great deal of feedback based on very different views, the SEC will soon be issuing its proposed rule on climate reporting. It is important that this rule simply be about disclosure of a material risk. Things like targets for carbon reductions are up to companies to adopt on a voluntary basis or not unless there are government-mandated requirements to do so. The political process will determine such things as subsidies for supporting technologies that help address climate change. There will be different party-based views on how best to do so, and this will get sorted out in legislation.
In terms of ESG more broadly, Mr. Crowley and I have also argued that “[t]he key will be returning ESG to its original and narrow intention — as a means for helping companies identify and communicate to investors the material long-term risks they face from ESG-related issues.” For this reason, I am pleased that Congress will be holding hearings on ESG. This will be a great opportunity to put ESG back in the box where it belongs. Of course, how these hearings are conducted will influence whether it is a learning opportunity that produces light or simply political theater that generates more heat.
I’m realistic and realize some fiery rhetoric is inevitable on both sides. But underneath that I’m very encouraged by the “Mandatory Materiality Requirement Act of 2022,” which was introduced by Senator Mike Rounds (R–South Dakota) and seven other senators in September 2022. Companion legislation H.R.9408 was introduced by Congressmen Bill Huizenga (R-Michigan) and Andy Barr (R-Kentucky) in December 2022. These provide a solid foundation for having this discussion.
Let me end with a modest suggestion for how a peaceful settlement can be reached in the “ESG Culture Wars.” Let’s stop using the term “ESG.” Instead, let’s talk about material risk factors that matter to shareholder value creation. These are separate from the negative externalities created by companies’ products and services. How best to deal with this is what the political process is for.
Robert G. Eccles
Visiting Professor of Management Practice, Said Business School, University of Oxford